Mark Kleinman on marketing and the City: EMI needs a new groove

Last week was not a good one for Guy Hands, the private-equity tycoon. Not only did he reveal that his status as a tax exile was preventing him visiting his family in the UK, he also disclosed that EMI, the British music company his Terra Firma vehicle bought from the stock market in 2007, had lost more than £1.5bn last year.

It was the second of these revelations that left the City open-mouthed in amazement. That EMI was in financial trouble was widely-known - indeed, it had been struggling for some time before it was taken private - but the scale of the loss was a shock.

The bald numbers do not tell the whole story, however. Much of that £1.5bn was due to the decline in the value of the shareholding in EMI of Terra Firma, Hands' private equity vehicle, since the takeover. Indeed, EMI Music Publishing, one half of the group business and home to the likes of Coldplay and Robbie Williams, is performing reasonably well.

In one sense, EMI's plight since Terra Firma's takeover simply reflects the structural challenges facing 'old media'. The internet has decimated the revenue streams they historically enjoyed, a vacuum that has been hard to fill.

That was why the appointment two years ago of Elio Leoni-Sceti, a Reckitt Benckiser executive with a strong marketing pedigree, to run EMI Music, was supposed to herald a turnaround in the value of the business. Some classic FMCG experience brought to an industry struggling to reinvent itself for the digital age would, Hands hoped, give EMI some breathing space.

Despite some improvement under Leoni-Sceti - the group made £293m in operating profit last year - the transformation has not been deep enough to protect EMI from the interest payments on the vast debt taken on by Hands to acquire the company.

Now, Terra Firma's investors are being asked to stump up another £100m-plus to help prevent a breach of EMI's banking covenants when they are tested at the end of March.

If they do not agree, Hands faces the unenviable choice of dipping into his own (deep) pockets or handing over the keys to principal creditor Citigroup.

To persuade investors to find the money, Hands has promised a new business plan from Leoni-Sceti. Part of that will be based on cost-cutting, and part on a pledge to substantially boost the proportion of EMI's revenues that are derived from digital channels.

The first of these is eminently deliverable: the company can jettison loss-making artists and trim head office costs, almost certainly by cutting jobs.

The second may be harder. In a letter to Hands, made public as part of a legal action being brought by him against Citigroup, last October Leoni-Sceti warned that EMI had, in the preceding nine months, 'lost distribution deals that would have generated incremental fee income of $13m per annum with the counterparties citing concerns about EMI's stability ...

We also have a number of global artists ... considering whether they should postpone their next studio album until the future with respect to EMI is clear'.

With such doubts hanging over it, taking long-term decisions about marketing investment is a practice riddled with uncertainty.

Yet this situation is about more than the fact that Hands overpaid for EMI three years ago. At its heart, it underlines the music industry's struggle - and, so far, its inability - to reinvent itself. Most of the innovation has come from technology firms such as Apple. The music companies badly need some fresh marketing insight if they are to capture the true value of their product.

Mark Kleinman is City editor at Sky News and a columnist for The Times

30 SECONDS ON ... EMI

- Anglo-American company Electric & Music Industries Ltd was founded in 1931 after the merger of the UK Columbia Graphophone Company and The Gramophone Company, parent of the His Master's Voice label.

- From the 50s into the 70s, EMI became one of the world's most successful music companies due to its ownership of Parlophone (the Beatles' label), Columbia (outside the US), HMV and Capitol Records.

- EMI claims to have been the first company to release a digital album download, David Bowie's Hours, in 1999.

- As well as the music business, EMI was involved in large-scale electronics research and manufacture from the 40s to the 80s. It worked on everything from guided missiles to the first BBC TV transmitter, TV cameras, the first transistorised computer and the first CAT scanner.

- EMI Music Publishing is the world's biggest music publisher, with a catalogue of more than 1.3m songs, 1000 of which have been US or UK number ones.

This article was first published on Marketing